Euro And Kiwi Dragged Lower

The end of the Grand Coalition in Germany and the need for a coalition in New Zealand are weighing on the respective currencies.  The euro was marked down in Asia and briefly dipped below $1.19 before recovering to $1.1940 by the middle of the Asian session. It was sold to new lows in the European morning after the weaker than expected IFO survey. Today’s survey stands in contrast to the recent PMI and ZEW survey and matches the mood of the market. The euro’s low from last week was near $1.1860. In only one session this month, the euro traded below $1.1850. 

 

The political dynamics in Germany took another turn as AfD party, which was the single biggest winner in the national elections, and emerged as a potentially powerful parliamentary force with about 80 seats faced an important fissure. The moderate leader (Petry) of the party, which has gone further done the anti-immigration path, has indicated she will not sit with the party in the Bundestag.  

 

Separately, Macron’s new party did poorly in the weekend’s Senate contests. The upper chamber in France is not elected by popular vote but by mayors and regional officials. The center-right Republicans held their majority. Macron’s labor reforms are not at risk, but Constitutional changes will be more difficult. With labor reforms signed into law, Macron’s attention turns to fiscal issues this week. The draft budget is expected to be presented. It seeks to cut spending and taxes, and reduce the deficit.  

 

Meanwhile, the confrontation between the independent-minded Catalonians and Madrid escalated over the weekend. The issue is not resolved, but the market appears to be taking it in stride today. Spanish and Italian two-year yields are less than a single basis point firmer, while the 10-year yields are that much softer. Spanish stocks, on the other hand, are underperforming today, losing about 0.6%, while the Dow Jones Stoxx 600 is up about 0.25%. Financials are the biggest drag on the European benchmark and are off 0.50%.